Fitch Rating Service Is Denied Journalistic Privilege in a Suit

A federal appeals court ruled yesterday that Fitch Inc., the credit rating service, could not invoke a journalistic privilege to avoid turning over information and testifying in a civil case that involved securities that it considered rating.

The United States Court of Appeals for the Second Circuit said that while Standard & Poor's, a competitor of Fitch, had previously been found to be entitled to the limited privilege of journalists under New York's shield law to avoid being forced to provide evidence, Fitch was not so entitled in this case.

The court noted that an important element in a 1993 ruling extending that privilege to S.& P. had been the conclusion that S.& P. ''rated virtually all public debt financing and preferred stock issues whether they were done by S.& P. clients or not.'' But Fitch, it said, seldom if ever does ratings unless a client has paid for the rating. ''We believe this practice weighs against treating Fitch like a journalist,'' it said.

The issue involved a suit filed by American Savings Bank, a Hawaii bank, against UBS Paine Webber. Paine Webber had designed derivative securities for the bank to buy that were supposed to gain investment-grade ratings, thus satisfying bank regulators, while giving the bank equity-like returns that it could not otherwise obtain. Bank regulators ruled the deal illegal, and the bank sued Paine Webber after it refused to buy back the securities.

The court said there was evidence that Fitch had helped to design the securities, even though in the end it did not rate them, and that the bank could seek information from Fitch regarding the structuring of the transactions.

Fitch's general counsel, Charlie Brown, noted that the ruling stated that it was not determining whether Fitch could ever gain the protection of the shield law. ''While we are disappointed by the outcome of the ruling, we believe the ruling itself is narrow and will have limited applicability to the rest of our business,'' he said. ''We continue to believe that as publishers we are entitled to all the protections of the First Amendment.''